Time the market game – Should you play?

The theory of investing should be simple. Buy stocks when they are low and then sell them when they are high. Even better would be to buy them at their absolute lowest and sell them at their absolute highest. Welcome to the time the market game. A simple concept that is notoriously difficult to implement.

For a lot of people it is really hard to comprehend why. After all there are numerous indicators that attempt to tell us where the market stands at any point in time.

However, even though they have been proven to provide some level of accuracy, it doesn’t mean we can use them to choose when we buy or sell.

Vanguard, the largest provider of mutual funds, has a view on market timing indicators. It says:

Research indicates that popular gauges such as growth rates, price-to-earnings ratios and profit margins offer virtually no guidance on equity prices over an annual period.

Vanguard

Some think it is too difficult to predict what the market is going to do because the market comprises people and people just aren’t rational.

When the market goes on a bull run, investors rush to buy stocks simply because they are going up. Likewise, in a bear market investors sell their shares for no other reason than they are going down.

In reality investors should do the opposite, buying cheap and selling expensive, but they don’t. They let their emotions take over and end up market timing at exactly the wrong times.

What is really crazy is the fact that simply buying stocks because they are going up could actually improve a company. When a company’s stock price goes up, the company has more equity.

More equity means more capital and more capital means more resources. Companies with less money are going to have less of all these things. Without them, it would be hard to compete. It is almost a self fulfilling prophecy.

Some think you can’t do market timing because the prices of shares are always right. Whatever is currently going on and predicted to go on in the future is already included in the price.

Others argue the complete opposite is true. They believe nobody has a clue what’s going to happen. A freak of nature or terrorist event could impact the markets in an instant.

No matter what the reason is, abundant evidence suggests the time the market game is too difficult to do, so investors would be foolish to even attempt it. In fact, you are better off just staying in the market through thick and thin. Pulling out of it can be severely detrimental to your investment returns.

Looking at the evidence

The graph below from Vanguard shows a 30 year period from 1986 until 2016. The blue line is the return of the FTSE All-Share Index, which is an index of the UK stock market. The grey line also shows the FTSE All-Share Index, but doesn’t include the 10 best days. If you had missed those 10 days you would have lost just about half your return.

Here’s a quote from the founder of Vanguard, John C.Bogle from his book Common Sense on Mutual Funds.

The idea that a bell rings to signal when investors should get into or out of the stock market is simply not credible. After nearly fifty years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently.

John C.Bogle, Common Sense on Mutual Funds

What can we do if we can’t play this time the market game? Well, we can invest in a diversified portfolio of stocks and bonds and maintain our allocations through thick and thin. That way we will automatically buy cheap shares and sell expensive shares.

For those who are yet to be convinced, the JP Morgan Guide to Retirement 2018 Edition goes into even more detail regarding missing days with the US stock market. The following table shows what would happen if investors in the US stock market missed more than 10 days.

It shows a time period of almost 20 years, but missing just the 30 best days would have produced negative returns, compared to a positive 7.2% return for those who remained in the market throughout.

I don’t need to spend much time looking at the chart to be convinced not to bother with market timing.